If you let the options holders cash out some of their shares during the financing round, that offsets the tax issue. Then they could afford to exercise, pay the tax bill, and take some money off the table.

Also, how do you come up with the price for the common shares when they aren't liquid and aren't changing hands? It seems weird to give a price of $10/share for a common share when you aren't able to sell at that price.

409a valuation. There is a process. But generally the common price is much lower than the preferred.

It's still just a fantasy price if you can't actually sell your shares at that price.

I don't really understand what point you are trying to argue. It's not a price, it's a valuation; the price is derived from there. Do you think that companies have zero value always?